Earnings season has started on a feeble note, with IT bellwether Infosys posting a disappointing set of quarterly numbers. Fourth quarter net profit has grown at a lower-than-expected 2.1% quarter-on-quarter and revenues have also missed street estimates, growing at 2%. In addition to that, the company stock took a beating on Friday, and closed nearly 10% lower on weak guidance. CNBC-TV18’s Vineetha Ahtrey and Sunanda Jayasheelan find out what went wrong with Infosys.
So far, 2011 has been a troublesome year for Infosys as the company has witnessed a dismal set of fourth quarter numbers. The company blames this on higher expenses during the quarter, high tax rates, and currency fluctuations. The company and its subsidiaries may have added 34 clients during the quarter, but lower spending by clients in light of global uncertainties has hurt its performance.
Reacting on this disappointing result, V Balakrishnan, CFO of Infosys said, “After the big recession in the US, clients fine-tune their spending in what’s happening in the macroeconomic environment much more quickly than what they used to be. Earlier the lag effect is always 2-3 quarters, today it’s immediate. So when they see all the uncertainties in the global economic environment they fine-tune their spending.”
Better client budgets for FY12?
Next’s client budgets are a little encouraging. However, with uncertainties refusing to go away, Infosys has remained cautious. This caution, however, has prompted Infosys to temper its FY12 guidance.
“Everyone has finalized a budget. So we have much more clarity on what we are going to spend but whether we will actually spend that money is a concern because the economic environment continues to be challenging,” said Balakrishnan.
It expects revenues, in rupee terms, to come in just 15-17% higher than in FY11. Also, Infosys had expected currency fluctuations to squeeze margins by 100 basis points in the previous quarter. It now says that these pressures could build in FY12, putting more pressure on margins.
“If the growth comes much better than what we expect probably you will have upside on the margins. But right now depending on the visibility, depending on the investment you are making we are assuming 250 to 300 basis points impact on the margin,” he adds.
However, currency volatility is not the only trouble area.
Infosys expects to hire nearly 45,000 people next year. These employees will come in at a wage hike of 10-12% for offshore employees and 2-3% for onsite employees.
Can employee addition affect Infosys' margins?
During this quarter, Infosys' margins has a nearly 100-120 basis points hit due to wage hikes and utilization and considering they made only 43,000 offers last year, the pressure on margins is expected to continue.
S Gopalakrishnan, MD & CEO of Infosys said, “This quarter has ended up as a soft quarter and the volatility in the environment has also increased. Sometimes these decisions get delayed due to external circumstances and that's the typical fourth quarter. We expect over the next full year to be a normal year and that's why we guided for 18% to 20%.”
Analysts have not forgotten that this is the second quarter in a row that Infosys has disappointed them. However, since the company has a tradition of giving a conservative guidance and then beating it, they hope FY12 will be good to the IT giant.
Source: www.moneycontrol.com
Thanks,
Gaurav Agarwal
Head Dealer
DENIP consultants Pvt LTd
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